Energy Transition Scenarios and Investment Pathways (2025 – 2040)

Scenario Framework and Key Assumptions

The future of the global energy system is deeply uncertain, shaped by dynamic interdependencies between policy, technology, market forces and social factors. To address this uncertainty, the study employs a scenario-based framework that models three contrasting pathways between 2025 and 2040. Each scenario reflects a coherent set of assumptions around carbon policy, technology adoption, investment levels and fossil fuel dependence.

Rather than attempting to predict a single outcome, the scenarios offer a structured basis for understanding trade-offs and decision points across a range of plausible futures. The scenarios share a common modelling structure and baseline data but diverge significantly in their key input drivers and policy ambition.

Reference case assumptions

The reference case provides the foundation for all three scenarios. It captures current policies and observed trends as of 2025, with no significant acceleration in climate ambition or structural disruption beyond those already in motion.

Core reference assumptions include:

• Global GDP growth: A compound annual growth rate of 2.8 percent from 2025 to 2040, with higher rates in Asia Pacific and Sub-Saharan Africa.
• Population growth: World population reaching 9.2 billion by 2040, with rapid urbanisation driving energy demand in developing markets.
• Technology costs: Continued but incremental declines in the cost of solar PV, wind, battery storage and electrolytic hydrogen, based on historical learning curves.
• Carbon pricing: Modest increases across the OECD, with limited penetration in emerging markets.
• Coal retirements: Coal fleet reductions concentrated in Europe and North America, but largely offset by capacity additions in South Asia and Africa.
• Gas infrastructure: Moderate growth in LNG terminals and gas pipelines to meet baseline energy security concerns.
• Renewables deployment: Continues to expand but constrained by grid and permitting bottlenecks in many countries.
• Investment climate: Stable access to capital in advanced economies, with emerging markets facing higher risk premiums and policy delays.

This reference case underpins all quantitative modelling and forms the pivot point for deviations in the three primary scenarios.

Rapid decarbonisation pathway

The rapid decarbonisation pathway reflects an ambitious and coordinated global effort to limit global warming to well below 2°C, in line with the Paris Agreement. Governments and private actors act early and decisively, accelerating the phase-out of coal, scaling renewable energy, electrifying end-use sectors and investing heavily in system flexibility.

Key assumptions:

• Carbon pricing: Broad and steep global carbon pricing is implemented, reaching over USD 150 per tonne in many countries by 2040.
• Coal phase-out: All OECD coal plants retired by 2035; non-OECD coal capacity falls by 65 percent by 2040.
• Renewables expansion: Solar and wind together reach over 65 percent of global electricity generation by 2040. Offshore wind and hybrid systems are heavily deployed.
• Storage and grid: Large-scale battery deployment and advanced grid management enable high renewable penetration.
• Natural gas: Plays a transitional role through 2030, but demand peaks by 2032 and falls thereafter. New gas investments are minimal.
• Hydrogen and electrification: Green hydrogen becomes commercially viable for industry and transport by the early 2030s. Electrification of heat and mobility accelerates in all major markets.
• Capital allocation: Investment in clean energy infrastructure exceeds USD 3.5 trillion annually by 2035.

This scenario assumes international cooperation, industrial policy alignment, and sustained political will, particularly in climate-vulnerable economies. It delivers the most significant reductions in carbon emissions and fossil fuel use.

Balanced transition pathway

The balanced transition pathway reflects a world where current policy intentions are implemented effectively, but no major new commitments are made beyond those already announced. Technology improves steadily, and renewables continue to gain ground, but fossil fuels remain part of the energy mix, particularly in hard-to-abate sectors.

Key assumptions:

• Carbon pricing: Gradual increase in carbon pricing in Europe, North America and selected Asian economies. Price levels remain below USD 100 per tonne in most markets.
• Coal reductions: Coal capacity declines by 40 percent globally by 2040, with gradual retirements and selective retrofitting for CCS.
• Natural gas: Gas use grows in the 2020s, plateaus by the mid-2030s, and then begins a managed decline. Gas serves as a balancing source for variable renewables.
• Renewables share: Solar and wind reach around 45 to 50 percent of global electricity generation. Deployment is steady but moderated by policy inconsistencies and supply chain constraints.
• Infrastructure investment: Grid modernisation and storage are deployed, though not at the pace required for full decarbonisation.
• Hydrogen: Commercial uptake occurs in selected industrial clusters and transport niches but remains below 10 percent of total energy use.
• Capital flows: Annual clean energy investment rises to around USD 2.4 trillion by 2040, supported by blended finance and institutional investors.

This scenario represents a realistic median case, balancing ambition with constraints. It enables significant emissions reductions while preserving energy security and affordability for most regions.

Delayed action pathway

The delayed action pathway describes a future in which global progress on climate mitigation slows due to geopolitical tensions, weak policy coordination, and investor caution. Fossil fuels retain a central role, and energy system transformation is fragmented and uneven.

Key assumptions:

• Carbon pricing: Limited or no new pricing mechanisms beyond existing policies. Prices remain below USD 50 per tonne in most jurisdictions.
• Coal persistence: Coal capacity declines modestly in OECD markets but increases in Asia and Africa. Global coal capacity declines only 15 percent by 2040.
• Natural gas growth: Gas becomes the dominant fossil fuel, expanding its role in power generation, industry and heating. LNG infrastructure is heavily built out.
• Renewables progress: Growth slows due to high capital costs, permitting backlogs and weak policy signals. Renewables reach just 35 to 40 percent of electricity generation by 2040.
• System rigidity: Limited storage, outdated grids and low public investment restrict renewable integration.
• Hydrogen and electrification: Commercialisation is delayed to the late 2030s, with minor contributions to energy demand.
• Capital flows: Clean energy investment stagnates at around USD 1.4 trillion annually. Fossil fuel investments remain robust.

In this scenario, emissions remain high through 2040, and the global carbon budget for 2°C is likely exceeded. It presents significant long-term physical and financial risks but may appeal to short-term economic pragmatism in certain regions.

Comparative Modelling Results

This section presents the comparative results of the scenario modelling, focusing on the performance of key energy system components across the Rapid Decarbonisation, Balanced Transition and Delayed Action pathways. The outputs highlight critical divergences in fuel demand, technology deployment, emissions outcomes and system-wide investment needs. While all scenarios share a common reference baseline, the results illustrate the compounding effects of policy ambition, technology cost trajectories and capital allocation over time.

Renewables expansion trajectories

Renewable energy deployment accelerates in all three scenarios, but the pace and scale vary significantly:

Indicator	Rapid Decarbonisation	Balanced Transition	Delayed Action
Total renewable share of power generation (2040)	67%	49%	38%
Installed solar PV capacity (2040)	6,500 GW	4,200 GW	2,900 GW
Installed wind capacity (2040)	4,200 GW	2,800 GW	1,900 GW
Annual renewables investment by 2035	USD 2.6 trillion	USD 1.7 trillion	USD 900 billion

In the Rapid Decarbonisation pathway, utility-scale solar and offshore wind are heavily deployed in Asia, North America and Europe. Storage and digital grid infrastructure enable flexible operation at high penetration levels. The Balanced Transition scenario reflects steady, policy-driven growth with slower integration of hybrid and dispatchable renewable systems. In the Delayed Action case, cost and policy constraints limit expansion to high-resource, low-risk locations only.

Natural gas demand and supply outlook

Natural gas plays divergent roles depending on the scenario:

Indicator	Rapid Decarbonisation	Balanced Transition	Delayed Action
Global gas demand (2040, bcm)	3,200	4,100	5,000
Gas share of power generation (2040)	10%	18%	24%
LNG capacity expansion (2025–2040)	+25%	+40%	+60%

In the Rapid Decarbonisation case, gas demand peaks before 2030 and declines as renewable integration and electrification accelerate. Supply contracts in tandem, especially in OECD countries, with limited LNG infrastructure growth. The Balanced Transition scenario retains gas as a balancing fuel and for industrial use, leading to plateauing demand in the mid-2030s. In the Delayed Action pathway, gas becomes the backbone of the global energy system, filling gaps left by lagging renewables and slow coal retirements.

Coal to gas switching dynamics

Coal-to-gas switching occurs in varying degrees and durations across the scenarios:

• Rapid Decarbonisation: Coal is phased out quickly, with gas acting as a temporary replacement primarily in the 2025–2032 window. Switching is supported by carbon pricing and coal retirement mandates, especially in the US, EU and South Korea.
• Balanced Transition: Switching remains a medium-term decarbonisation strategy through 2035, with gas displacing coal in China, India and parts of Southeast Asia where infrastructure exists.
• Delayed Action: Coal-to-gas switching occurs only where driven by economics or local air quality concerns. In some regions, coal use persists due to underdeveloped gas markets or sunk capital in thermal assets.

The emissions advantage of switching is scenario-dependent. In Rapid Decarbonisation, it acts as a bridge to deeper decarbonisation. In the Delayed Action scenario, it reinforces fossil fuel lock-in.

Planned and unplanned coal plant retirements

The trajectory of coal plant retirements is a key differentiator across scenarios:

Indicator	Rapid Decarbonisation	Balanced Transition	Delayed Action
Global coal capacity retired (2025–2040)	1,400 GW	900 GW	400 GW
Unplanned early retirements	High (policy-driven)	Medium (market-driven)	Low
Remaining coal fleet age (2040)	<15 years (avg.)	~25 years (avg.)	>30 years (avg.)

In the Rapid Decarbonisation scenario, early retirements are supported by just transition policies, capacity payment buyouts, and utility asset restructuring. In the Balanced case, retirements are market-based, driven by cost competition and emissions regulation. In the Delayed Action pathway, most coal plants operate to the end of their technical life or longer, resulting in ageing, inefficient fleets with rising maintenance costs and emissions.

Cross scenario emissions outcomes

The differences in system composition and fuel use translate directly into emissions trajectories:

Indicator	Rapid Decarbonisation	Balanced Transition	Delayed Action
Global energy-related CO₂ emissions (2040)	14 Gt	22 Gt	29 Gt
Emissions reduction from 2025 baseline	-48%	-23%	-6%
Power sector emissions (2040)	4.1 Gt	7.5 Gt	10.2 Gt
Compliance with Paris goals	Likely (1.7–1.9°C)	Unlikely (2.3–2.5°C)	Off-track (>3°C)

The Rapid Decarbonisation pathway is the only scenario consistent with a 2°C-compatible trajectory, assuming international cooperation and technology diffusion. The Balanced Transition delays peak emissions to the early 2030s, offering partial mitigation with long-term risks. In the Delayed Action scenario, emissions plateau late and decline only marginally, jeopardising climate stability and increasing adaptation costs.

System cost implications and costs

Transitioning to low-carbon energy systems involves substantial capital reallocation, but long-term cost savings are possible through efficiency gains and avoided fossil fuel consumption:

Indicator	Rapid Decarbonisation	Balanced Transition	Delayed Action
Total system investment (2025–2040)	USD 48 trillion	USD 39 trillion	USD 33 trillion
Annual average energy system cost (% of global GDP)	2.7%	2.4%	2.1%
Fossil fuel subsidies and externalities (2040)	Lowest	Medium	Highest
Long-run marginal cost of electricity (2040)	45–55 USD/MWh	55–65 USD/MWh	65–80 USD/MWh

Although the Rapid Decarbonisation pathway has the highest upfront capital intensity, it delivers lower operational costs, reduced fuel price volatility, and fewer environmental externalities. The Delayed Action pathway appears less costly in the near term but results in stranded assets, long-term fuel costs and higher emissions-related losses.

Technology Cost and Performance Outlook

This section provides a forward-looking assessment of the expected cost trends and performance improvements for key technologies underpinning the energy transition. The projections are informed by learning rate analysis, innovation pipelines, supply chain dynamics and policy support levels. Differences in deployment levels across the three scenarios are driven not only by policy but also by technology maturity and cost competitiveness by region and application.

Solar photovoltaic utility scale and distributed

Solar photovoltaic (PV) systems continue to exhibit rapid cost declines and rising efficiency, driven by innovations in materials, manufacturing scale and digital system optimisation.

Utility-scale solar PV:

• Capital costs are expected to decline by 35 to 50 percent by 2040, depending on scenario and region.
• Global weighted average Levelised Cost of Electricity (LCOE) may fall to between USD 20 and 30 per MWh in high-irradiance regions by 2035 in the Rapid Decarbonisation scenario.
• Bifacial modules, tracker systems and utility-scale hybridisation with storage become standard by the early 2030s.

Distributed solar PV:

• Residential and commercial rooftop systems benefit from improved inverter efficiency, modular battery integration and smart grid compatibility.
• Costs decline more modestly, constrained by soft costs and regulatory barriers, particularly in emerging markets.
• Grid defection remains unlikely in most regions, but self-consumption becomes economically attractive in high-cost retail tariff markets.

In all scenarios, solar PV plays a foundational role in future power systems, particularly in Asia, Africa and Latin America.

Onshore and offshore wind

Wind technologies continue to scale in both turbine size and deployment complexity, with offshore wind emerging as a key pillar of low-carbon baseload generation.

Onshore wind:

• Cost declines continue but at a slower rate than solar, with global LCOE reaching USD 30 to 40 per MWh by 2040.
• Improvements in blade length, digital O&M and modular towers expand viable sites and reduce capacity factor variability.
• Land-use constraints and permitting delays remain critical barriers, especially in densely populated or conservation-sensitive areas.

Offshore wind:

• Offshore wind becomes increasingly competitive, with LCOE projected at USD 40 to 60 per MWh by the mid-2030s in the Rapid Decarbonisation scenario.
• Floating platforms open new deepwater markets by the early 2030s, particularly in Japan, South Korea and the west coast of the Americas.
• Supply chain bottlenecks and port infrastructure limitations may moderate deployment rates in the Delayed Action pathway.

Both onshore and offshore wind contribute substantially to renewable penetration in grid-dense, industrialised economies, especially in Europe and East Asia.

Battery energy storage systems

Battery energy storage systems (BESS) are critical for integrating variable renewables and enhancing system reliability. Technology innovation is rapidly lowering costs and diversifying application value.

• Lithium-ion batteries remain the dominant technology through 2035, with costs projected to fall from USD 130/kWh in 2025 to below USD 75/kWh by 2040 in the Rapid Decarbonisation scenario.
• Utility-scale BESS systems increasingly support frequency regulation, capacity markets and peak shaving.
• Deployment of 4 to 8-hour systems becomes common, with some regional markets favouring longer-duration chemistries (for example, iron-air, sodium-sulphur).
• Co-location of BESS with solar and wind improves dispatchability and lowers integration costs.
• Supply risks for lithium, cobalt and nickel may increase in the Delayed Action scenario due to slower recycling uptake and geopolitical constraints.

Storage becomes a strategic asset in power system planning, with annual deployments surpassing 150 GW by 2040 in the Rapid Decarbonisation pathway.

Carbon capture use and storage for gas and coal

Carbon capture, use and storage (CCUS) technologies are central to decarbonising fossil fuel-based generation and heavy industry, but deployment trajectories differ significantly across scenarios.

• Capture costs for power generation are projected to fall from USD 85–110 per tonne CO₂ in 2025 to USD 55–70 per tonne by 2040, assuming continued innovation and scale.
• Gas-fired generation with CCS gains greater traction than coal with CCS due to lower capital intensity and higher capture efficiency.
• The Rapid Decarbonisation scenario sees strong deployment in hydrogen production (blue hydrogen) and cement/steel sectors.
• In the Balanced Transition pathway, CCUS adoption is limited to regions with favourable geology and infrastructure.
• In the Delayed Action scenario, CCUS is underutilised due to weak policy frameworks, slow permitting and limited carbon pricing incentives.

Large-scale transport and storage infrastructure remains a gating factor in all scenarios, requiring coordinated planning and public-private financing mechanisms.

Emerging low carbon fuels hydrogen and ammonia

Hydrogen and ammonia are increasingly seen as key vectors for decarbonising hard-to-abate sectors and enabling cross-sector integration.

Hydrogen:

• Green hydrogen (produced via electrolysis from renewables) becomes cost-competitive with grey hydrogen (from fossil fuels) by the early 2030s in high-renewable regions, under the Rapid Decarbonisation scenario.
• Levelised cost of green hydrogen falls to USD 1.2 to 1.8 per kg by 2040, assuming electrolyser CAPEX declines to below USD 250/kW and high utilisation rates are achieved.
• Applications include refining, steelmaking, heavy transport, and seasonal power storage.

Blue hydrogen (from methane with CCS) plays a transitional role in the Balanced Transition and Delayed Action scenarios.

Ammonia:

• Used as a hydrogen carrier and a direct fuel in maritime shipping and potential co-firing in thermal power plants.
• Production costs for green ammonia are expected to drop below USD 500 per tonne by 2040, depending on feedstock and electrolyser costs.
• Infrastructure challenges and safety regulations may delay scaling in the Delayed Action scenario.

Hydrogen and ammonia markets are highly sensitive to global coordination on standards, pipeline infrastructure and certification regimes. In the Rapid Decarbonisation scenario, international trade in clean fuels emerges as a strategic industrial policy priority.

Monitoring and Metrics for Transition Progress

Effective monitoring is essential to ensure that the energy transition remains on track, both in terms of emissions reductions and broader socio-economic outcomes. This section of our study outlines a structured framework for assessing progress across sectors, technologies and policy environments. By establishing consistent, comparable and transparent metrics, stakeholders can evaluate whether transition pathways are delivering their intended impact and identify areas requiring course correction.

Key performance indicators by sector and technology

The transition to a low-carbon energy system requires targeted tracking of sector-specific and cross-cutting indicators. Key performance indicators provide measurable benchmarks across deployment, cost, performance and emissions metrics. These include:

Power generation:

• Share of renewables in total electricity generation (%)
• Installed capacity additions by technology (MW/year)
• Power sector emissions (Mt CO₂/year)
• Grid flexibility and storage capacity (GW and GWh)

Industry:

• Share of low-carbon fuel use in high-heat processes (%)
• Carbon capture capacity in heavy industry (Mt CO₂/year)
• Hydrogen consumption in refining and steel (% of total feedstock)

Transport:

• Share of electric vehicles in new car sales (%)
• Rail and maritime fuel switching (low-carbon share, %)
• Charging infrastructure density (stations per 100,000 vehicles)

Buildings:

• Share of clean heating (heat pumps, district heating) (%)
• Annual building retrofit rate (% of existing stock)
• Energy intensity of residential buildings (kWh/m²/year)

Fuels and storage:

• Annual production of green and blue hydrogen (Mt/year)
• Ammonia bunkering capacity and use (kT/year)
• Battery energy storage deployment (GWh/year)

These KPIs should be updated annually and disaggregated by region, technology and scenario to assess the rate of progress and identify lagging areas.

Benchmarking tools for policy and investment effectiveness

Benchmarking is critical to evaluate the effectiveness of national policies and private-sector investment strategies. Several tools and methodologies are recommended:

• Policy scoring matrices: Evaluate the ambition, credibility and enforcement of renewable targets, coal phase-out mandates, and carbon pricing frameworks.
• Levelised policy impact metrics: Estimate the marginal abatement cost per tonne of CO₂ avoided under different subsidy and tax schemes.
• Investment intensity benchmarks: Track public and private investment per unit of clean energy deployed (USD/MW or USD/tCO₂ avoided).
• Transition finance taxonomies: Categorise financial flows to green, transitional and incompatible activities, aligned with emerging disclosure frameworks.

Comparative benchmarking across peer countries or regions enhances transparency, encourages best practice diffusion, and fosters accountability.

Alignment with UN SDGs and net zero targets

Energy transition efforts must be aligned not only with climate targets but also with the broader development agenda, as articulated in the UN Sustainable Development Goals (SDGs). Key areas of alignment include:

• SDG 7 (Affordable and Clean Energy): Increased access to electricity, rising renewable energy share, and improved energy efficiency.
• SDG 9 (Industry, Innovation and Infrastructure): Deployment of clean industrial technologies and resilient grid infrastructure.
• SDG 11 (Sustainable Cities and Communities): Electrification of transport, building decarbonisation and urban air quality improvements.
• SDG 13 (Climate Action): Net zero alignment, emissions reduction trajectories and national adaptation planning.

To ensure meaningful alignment, transition planning should embed co-benefit analysis, social impact assessments, and inclusive stakeholder engagement. Equity and energy access must remain central to decision-making, particularly in emerging economies.

Net zero compatibility is assessed based on interim targets (for example, 2030 and 2035), long-term emissions pathways and cumulative carbon budgets. Alignment tools such as the Science Based Targets initiative (SBTi), IEA Net Zero Roadmap benchmarks and national Long-Term Strategies (LTS) should be used as reference frameworks.

Annual tracking frameworks and reporting templates

Consistent and transparent annual tracking enables course correction and supports investment confidence. Recommended practices include the following:

• National Energy Transition Progress Reports: Structured annual publications detailing policy updates, capacity changes, emissions data, and financial flows.
• Global Scenario Comparison Dashboards: Interactive visual tools enabling users to compare national progress against scenario benchmarks.
• Company-level Climate Disclosure: Standardised reporting on Scope 1, 2 and 3 emissions, transition plans, and capital allocation, using frameworks like TCFD and ISSB.
• Project-level Transition Metrics: For infrastructure projects, report expected lifetime emissions savings, job creation, and alignment with net zero pathways.

These tools should be developed with input from national energy agencies, multilateral institutions and industry stakeholders. Digital tracking systems, satellite data, and machine learning can enhance data accuracy and reporting frequency over time.

Policy and Regulatory Environment

The policy and regulatory landscape plays a critical role in shaping investment flows, technology adoption, and the overall pace of the energy transition. This section outlines the key frameworks, instruments and governance trends that influence how countries and markets navigate decarbonisation pathways from 2025 to 2040.

Global climate commitments and targets

International climate agreements provide overarching goals that guide national policies and corporate strategies. The Paris Agreement remains the cornerstone, with countries submitting Nationally Determined Contributions (NDCs) that outline emission reduction pledges.

• Many jurisdictions have adopted or are formulating net zero targets for 2050 or earlier, embedding these commitments in law or long-term strategies.
• Interim targets for 2030 and 2035 have gained prominence as critical milestones to ensure trajectories are aligned with limiting warming to 1.5°C.
• Increasingly, sector-specific commitments are emerging, including coal phase-out dates, renewable portfolio standards, and mandates for electric vehicle uptake.
• Enhanced transparency frameworks, including regular reporting under the UNFCCC and alignment with the Global Stocktake process, promote accountability and ambition ratcheting.
• Non-state actor commitments, including from cities, financial institutions and corporations, complement governmental targets and drive additional investment pressure.

The credibility and enforcement of these commitments vary significantly by region, influencing the relative attractiveness of different investment pathways.

Carbon pricing and fiscal incentives

Market-based instruments such as carbon pricing mechanisms and fiscal incentives are vital tools to internalise the external costs of greenhouse gas emissions and stimulate clean technology deployment.

• Carbon pricing models include carbon taxes, emissions trading systems (ETS) and hybrid approaches, each with distinct coverage, price levels and market liquidity characteristics.
• The global average carbon price remains below levels widely considered necessary to achieve the Paris goals, but a growing number of jurisdictions are raising prices or expanding ETS scopes.
• Revenues generated from carbon pricing are increasingly recycled into clean energy subsidies, just transition funds, and innovation grants.
• Fiscal incentives include accelerated depreciation, investment tax credits, production tax credits, and feed-in tariffs targeted at renewables, storage, and electrification technologies.
• Some countries implement fossil fuel subsidy reforms alongside clean energy support, while others face political resistance.
• The design of these instruments influences investment certainty and risk perceptions, affecting capital costs and deployment timelines.

Scenario modelling incorporates varying degrees of carbon pricing strength and fiscal support to assess impacts on technology uptake and emissions trajectories.

Grid access and market design reforms

As the power sector decarbonises, reforms to grid access rules and electricity market structures are essential to accommodate increasing shares of variable renewables, storage, and distributed resources.

• Grid codes are being updated to require enhanced system flexibility, faster frequency response and demand-side participation.
• Market designs are evolving towards greater use of real-time pricing, capacity markets, and ancillary service markets to incentivise flexibility and reliability.
• Transmission and distribution planning increasingly incorporates scenario-based analyses to optimise investments for future decarbonisation pathways.
• Regulatory reforms address barriers to third-party access, grid interconnection costs and curtailment reduction.
• Integration of distributed energy resources (DERs), including behind-the-meter storage and demand response, necessitates new coordination mechanisms and digital platforms.
• In many regions, reforms also aim to enable sector coupling, for example between power, heat and transport, supporting integrated energy system optimisation.

Successful market reforms reduce integration costs, improve system resilience and unlock private investment in grid infrastructure and clean technologies.

Environmental social and governance drivers

Environmental, social and governance considerations have become a critical factor influencing investor behaviour, corporate strategies and policy formulation in the energy sector.

• Environmental criteria focus on emissions performance, pollution control, biodiversity impacts and resource efficiency.
• Social factors include community engagement, labour standards, just transition planning and energy access equity.
• Governance encompasses transparency, risk management, compliance, and ethical standards.
• ESG integration into investment decisions has accelerated through mandatory disclosure regimes, sustainability-linked financing, and growing demand from institutional investors.
• Companies are increasingly assessed on climate risk resilience, scope 3 emissions, and alignment with net zero pathways.
• Policymakers incorporate ESG principles into licensing, permitting and infrastructure development processes.
• Social licence to operate remains a key determinant of project viability, especially in emerging markets and communities affected by transition impacts.

Incorporating ESG drivers ensures that the energy transition delivers not only emissions reductions but also social value and long-term resilience.

Regional Deep Dives

Understanding regional variations in policy, market dynamics and resource endowments is crucial for accurately assessing energy transition pathways. This section explores the distinctive transition drivers, challenges and investment opportunities across key world regions.

Europe pathway alignment with Fit for Fifty Five

Europe’s energy transition is strongly shaped by the European Union’s ambitious ‘Fit for Fifty Five’ package, which aims to reduce net greenhouse gas emissions by at least 55 percent below 1990 levels by 2030.

• The package sets binding targets for renewables deployment, energy efficiency improvements and carbon pricing enhancements across the EU member states.
• A comprehensive revision of the EU Emissions Trading System (ETS) strengthens the carbon price signal, with expanded sectoral coverage including maritime and buildings.
• Regulatory reforms support accelerated coal phase-out timelines, incentivising rapid coal-to-gas switching where feasible and direct renewable replacement.
• Substantial investment is channelled into grid modernisation, cross-border interconnections and offshore wind hubs, with a focus on just transition mechanisms in coal-dependent regions.
• Hydrogen strategies emphasise green hydrogen production and infrastructure, linking with industrial clusters and transport decarbonisation.
• Challenges include rising energy prices, social acceptance of transition measures, and ensuring energy security amid geopolitical uncertainties.

Europe’s pathway exemplifies a regulated, high-ambition approach with a strong focus on policy integration and cross-sectoral coordination.

North America federal and state dynamics

North America presents a complex landscape with a patchwork of federal policies and diverse state-level initiatives shaping the energy transition.

• The federal government has recommitted to ambitious climate targets under the US Inflation Reduction Act, prioritising clean energy tax credits, EV incentives and methane emission reductions.
• State policies vary widely: some states like California and New York lead with aggressive renewables mandates and zero-emission vehicle targets, while others maintain fossil fuel-friendly stances.
• Market structures include deregulated and vertically integrated systems, influencing investment risk and technology adoption rates.
• Natural gas remains a critical transition fuel, with infrastructure investments balancing supply security and emissions reductions through carbon capture.
• Canada’s approach focuses on balancing resource exports with domestic decarbonisation, including enhanced carbon pricing and support for clean electricity exports.
• Indigenous and community-led energy projects gain prominence, reflecting increasing recognition of social equity in transition planning.

Navigating federal-state interactions and regulatory heterogeneity is key to understanding North America’s transition investment pathways.

Asia Pacific growth and fuel mix shifts

Asia Pacific remains the world’s fastest-growing energy market, with diverse transition trajectories reflecting differing development priorities and resource endowments.

• Rapid economic growth and urbanisation drive surging electricity demand, requiring significant capacity additions and system flexibility enhancements.
• China leads in renewables investment and EV deployment but continues to rely on coal for base load, committing to a peak around 2030 with accelerated retirements thereafter.
• India focuses on expanding solar, wind and distributed energy solutions while managing coal phase-out challenges linked to socio-economic dependencies.
• Southeast Asian nations pursue gas as a transition fuel, with infrastructure expansions and gradual renewables integration amid policy and financing constraints.
• Australia’s energy landscape features strong renewables growth, coal retirements and emerging hydrogen export ambitions.
• Challenges include grid integration complexities, financing gaps, and geopolitical risks affecting supply chains and technology transfer.

Fuel mix shifts are nuanced, with natural gas and renewables expanding concurrently, while coal declines vary widely by country.

Middle East and Africa gas pivot and export strategies

The Middle East and Africa region is characterised by its strategic role as a global fossil fuel exporter, alongside emerging ambitions to diversify and leverage gas as a transition enabler.

• Middle Eastern countries invest in expanding liquefied natural gas (LNG) capacity and pipeline networks to capitalise on global gas demand shifts.
• Regional strategies increasingly incorporate blue hydrogen production using natural gas with carbon capture, targeting export markets in Asia and Europe.
• Renewable energy projects, particularly solar and wind, gain momentum but remain secondary to hydrocarbon revenues in many economies.
• Africa’s energy access challenges drive renewable mini-grid and off-grid developments, supported by international climate finance and technology partnerships.
• Several African nations explore gas-fired power expansion to replace ageing coal and oil facilities while improving grid reliability.
• Political instability, infrastructure deficits and market fragmentation pose risks to consistent policy implementation and investment flows.

The gas pivot reflects a pragmatic approach balancing economic diversification with climate commitments, highlighting the region’s global energy market influence.

Latin America renewable resource potential

Latin America possesses abundant renewable energy resources, positioning the region as a key growth area for clean energy deployment and decarbonisation leadership.

• Hydropower remains the dominant generation source, supplemented by growing investments in solar PV, wind and bioenergy.
• Brazil leads in both biofuels and hydropower, with ambitious targets for electric mobility and green hydrogen development.
• Chile and Argentina capitalise on excellent solar and wind resources, attracting international investment and pioneering grid-scale battery storage.
• Policy frameworks increasingly support renewables auctions, grid upgrades and regional electricity market integration through organisations like SIEPAC.
• Challenges include regulatory uncertainty, currency volatility and financing constraints, which can delay project development.
• Social and environmental safeguards are gaining importance to balance infrastructure expansion with ecosystem and community protection.

The region’s renewable potential underpins a transition pathway focused on sustainable growth, export opportunities and social inclusivity.

Investment Pathways and Financing Structures

Successful energy transition pathways require not only robust technology deployment but also adequate and well-structured financing. This section examines evolving capital expenditure patterns, financing vehicles, investor dynamics and gaps that influence the viability and scale of clean energy investments from 2025 to 2040.

Capital expenditure trends by technology

Capital expenditure patterns reflect both the maturity of technologies and evolving market conditions.

• Renewables such as solar photovoltaic and onshore wind continue to see declining unit costs, driving increased capacity additions and investment volumes globally.
• Offshore wind investment is growing rapidly, with higher upfront costs but expanding market pipelines in Europe, Asia and North America.
• Battery energy storage systems require rising capex to meet demand for grid stability and electric vehicle integration.
• Natural gas infrastructure investments focus on flexible combined cycle plants, pipeline expansions and retrofit for carbon capture.
• Coal plant retirements impose costs related to decommissioning, site remediation and workforce transition.
• Emerging technologies including green hydrogen production facilities and carbon capture use and storage (CCUS) require substantial early-stage investment with higher perceived risk.
• Regional variations in capex reflect local labour costs, regulatory environments and financing conditions.

Tracking technology-specific capex trends informs strategic investment planning and scenario modelling of deployment pathways.

Project finance and green bond markets

Project finance remains a dominant mechanism for large-scale energy infrastructure, with several features that support transition investments:

• Limited recourse financing isolates project risks from sponsors, enabling mobilisation of diverse capital sources.
• Power purchase agreements (PPAs) and feed-in tariffs underpin revenue certainty, improving bankability.
• Green bonds and sustainability-linked bonds have become important instruments to raise dedicated capital for clean energy projects.
• The growth of labelled debt markets reflects rising investor demand for environmental, social and governance (ESG)-aligned assets.
• Climate finance initiatives and multilateral development banks provide concessional financing and guarantees to de-risk projects in emerging markets.
• Digitalisation and standardisation of documentation improve transaction efficiency and transparency.

However, challenges persist in aligning project timelines, risk profiles and returns with investor expectations, especially for nascent technologies.

Institutional investor appetite and risk perception

Institutional investors, including pension funds, insurance companies and sovereign wealth funds, play an increasingly important role in financing the energy transition.

• Appetite for green assets is driven by regulatory pressures, fiduciary duty evolution and growing recognition of climate risks.
• Investors seek stable, long-term cash flows from infrastructure and renewable energy projects with transparent governance and ESG credentials.
• Risk perception varies by region and technology maturity, with natural gas and coal-related assets facing heightened scrutiny or divestment trends.
• Transition risk assessments incorporate physical climate risks, regulatory changes, and market shifts affecting asset values.
• Engagement with portfolio companies on transition planning is expanding, fostering improved disclosure and strategic alignment.
• Innovative financing structures, such as blended finance and green securitisation, enable broader institutional participation.

Understanding investor preferences and concerns is critical to designing financeable transition projects and policies.

Public private partnership models

Public private partnerships offer mechanisms to leverage public funds and expertise alongside private capital to accelerate energy transition investments.

• PPPs support infrastructure development, including grid expansion, storage facilities and hydrogen production hubs.
• Risk-sharing arrangements address regulatory uncertainty, construction delays and revenue volatility.
• Governments provide guarantees, subsidies or co-investment to improve project bankability and attract private sector participation.
• Transparent procurement processes and clear contractual frameworks are essential to ensure alignment of incentives and accountability.
• Successful PPPs incorporate stakeholder engagement, capacity building and social safeguards to support inclusive outcomes.
• Regional development banks and international financial institutions often facilitate PPP frameworks and capacity development.

PPPs remain a vital tool to bridge financing gaps, particularly in emerging and frontier markets.

Funding gaps and policy support mechanisms

Despite growing capital flows, significant funding gaps persist in achieving ambitious energy transition targets.

• Investment shortfalls are most acute in emerging economies, distributed energy resources, and early-stage low carbon technologies.
• Policy uncertainty, regulatory fragmentation and limited project pipelines impede capital mobilisation.
• Support mechanisms to address funding gaps include targeted subsidies, risk mitigation instruments such as guarantees and insurance, and innovation grants.
• Carbon pricing revenues can be recycled to bolster clean energy financing and just transition funds.
• Multilateral climate funds and blended finance facilities mobilise concessional capital and private co-financing.
• Capacity building to enhance bankability, project preparation and financial literacy is critical to unlocking local investment.

Addressing funding gaps requires coordinated efforts across policy, finance and market stakeholders to create enabling environments that reduce perceived risks and catalyse sustainable capital flows.

Risk Sensitivity and Stress Testing

Robust energy transition planning requires careful consideration of risks that could disrupt investment pathways, technology deployment, and emissions outcomes. This section explores key risk factors, their potential impacts, and approaches to stress testing transition scenarios to enhance resilience and adaptability.

Fuel price volatility impacts

Fuel price volatility remains a significant source of uncertainty affecting energy markets, investment decisions and system costs.

• Fluctuations in natural gas, coal and oil prices influence the relative competitiveness of different generation technologies and the pace of fuel switching.
• Sudden price spikes can strain supply security, increase consumer energy costs and disrupt market equilibrium.
• Volatility may affect financing conditions, as lenders and investors price risk premiums accordingly.
• Scenario modelling includes sensitivity analyses on fuel price trajectories to assess impacts on technology dispatch, emissions profiles and capital expenditure.
• Hedging strategies and diversified supply portfolios are important risk mitigation tools for utilities and governments.
• Prolonged low fossil fuel prices can delay transition incentives by reducing the economic attractiveness of renewables and efficiency investments.

Understanding fuel price risk supports more robust transition planning and policy design.

Supply chain constraints and critical minerals

The energy transition depends heavily on supply chains for critical minerals and components, creating potential bottlenecks and cost escalations.

• Materials such as lithium, cobalt, nickel, rare earth elements and copper are essential for batteries, electric motors, solar panels and wind turbines.
• Concentrated geographic production, geopolitical tensions and export restrictions increase supply risks.
• Demand surges may outpace mining, processing and recycling capacities, leading to delays and price volatility.
• Supply chain disruptions from pandemics, trade disputes or transport constraints further exacerbate risks.
• Strategic stockpiling, diversification of sources, investment in recycling technologies and alternative materials development are key mitigation approaches.
• Stress testing incorporates mineral supply scenarios to evaluate impacts on deployment rates, technology costs and transition timelines.

Addressing supply chain risks is critical to maintaining momentum in decarbonisation pathways.

Policy reversal and regulatory delay scenarios

Energy transition outcomes are highly sensitive to the policy and regulatory environment, with reversals or delays posing material risks.

• Political shifts, public opposition or economic crises can slow or reverse climate commitments and incentives.
• Regulatory uncertainty reduces investment confidence and may lead to stranded assets or underutilised infrastructure.
• Delay in grid reforms, permitting processes or carbon pricing implementation can increase integration costs and slow technology adoption.
• Scenario analysis explores alternative policy trajectories, including delayed action or partial rollbacks, to quantify emissions and cost implications.
• Stakeholder engagement, transparent governance and adaptive policy frameworks enhance resilience against reversal risks.
• International cooperation and legal commitments may provide some stability but are not immune to geopolitical disruptions.

Understanding the consequences of policy risks supports development of contingency strategies and flexible investment pathways.

Extreme weather and climate physical risks

Physical climate risks from extreme weather events pose growing challenges to energy infrastructure reliability and investment security.

• Increased frequency and intensity of storms, heatwaves, floods, droughts and wildfires threaten generation assets, transmission and distribution networks.
• Disruptions can cause outages, damage equipment and increase maintenance costs.
• Climate resilience measures include infrastructure hardening, diversified energy sources, microgrids and improved forecasting.
• Stress testing scenarios assess impacts of climate-related disruptions on system stability, supply continuity and financial performance.
• Physical risks also influence insurance costs and financing terms, affecting project feasibility.
• Incorporating climate risk assessments into planning ensures that transition pathways remain viable under a range of environmental conditions.

Integrating physical risk considerations strengthens the robustness and sustainability of energy transition investments.

Strategic Implications for Stakeholders

The evolving energy transition landscape presents distinct strategic challenges and opportunities for key stakeholders. This section outlines critical considerations and recommended strategic responses for utilities, oil and gas companies, investors, governments and technology vendors navigating the pathway to 2040.

Utilities and independent power producers

• Diversify generation portfolios to balance renewables, flexible gas assets and emerging technologies, enhancing system reliability and meeting evolving regulatory requirements.
• Accelerate investment in grid modernisation and digitalisation to accommodate variable renewable energy and enable advanced demand-side management.
• Develop integrated energy services including storage, electric vehicle charging infrastructure and distributed energy resource management to capture new revenue streams.
• Enhance risk management capabilities to address fuel price volatility, regulatory uncertainty and climate physical risks.
• Engage proactively with policymakers and communities to shape favourable regulatory frameworks and ensure social licence for transition initiatives.
• Invest in workforce reskilling and just transition measures to support employee retention and community stability amid coal retirements and plant closures.

Strategic agility and innovation will be essential for utilities and independent power producers to thrive in increasingly competitive and decarbonised energy markets.

Oil and gas majors repositioning

• Pursue portfolio diversification through expansion into low carbon energy solutions such as renewables, hydrogen production, bioenergy and carbon capture use and storage.
• Leverage existing infrastructure and expertise to develop natural gas as a transition fuel with lower emissions intensity, including blue hydrogen projects.
• Invest in innovation and strategic partnerships to accelerate technology development and commercialisation of emerging energy solutions.
• Align capital allocation with climate commitments while managing legacy asset liabilities and decommissioning costs.
• Adapt business models to incorporate integrated energy system offerings and customer-centric services beyond fossil fuels.
• Enhance transparency and reporting to meet investor and stakeholder expectations on environmental, social and governance performance.

Oil and gas majors must balance short-term commercial realities with long-term transition imperatives to sustain competitive relevance.

Investors and financial institutions

• Integrate climate risk and transition scenarios into investment appraisal and portfolio management to optimise returns and mitigate stranded asset risks.
• Expand allocation to green assets including renewable energy projects, storage, grid infrastructure and low carbon fuels.
• Engage with investees on transition strategies and ESG disclosures to support enhanced performance and risk management.
• Develop innovative financing instruments such as sustainability-linked loans, green bonds and blended finance to mobilise capital efficiently.
• Monitor evolving policy landscapes and market dynamics to identify emerging risks and opportunities.
• Collaborate with regulators, industry and civil society to promote transparency, standardisation and best practices in sustainable finance.

Investors and financial institutions will play a pivotal role in enabling energy transition pathways through capital mobilisation and stewardship.

Governments and regulators

• Design coherent, long-term policy frameworks that provide clear investment signals and align with national and international climate commitments.
• Implement robust carbon pricing mechanisms and fiscal incentives to accelerate clean technology adoption and emissions reductions.
• Support infrastructure investments in grid modernisation, interconnections and hydrogen networks to enable system flexibility and integration.
• Facilitate innovation and technology development through targeted funding, public-private partnerships and regulatory sandboxes.
• Ensure just transition policies that address social equity, workforce retraining and community revitalisation in affected regions.
• Enhance data transparency and monitoring to track progress, enable adaptive policymaking and strengthen stakeholder trust.

Governments and regulators must balance competing priorities while fostering an enabling environment for rapid and equitable energy transition.

Technology vendors and service providers

• Accelerate product innovation focusing on cost reduction, performance enhancement and integration capabilities to meet diverse customer needs.
• Develop scalable solutions for grid integration, storage and sector coupling to support comprehensive decarbonisation pathways.
• Forge strategic partnerships and alliances to expand market access and co-develop tailored offerings.
• Invest in digitalisation and data analytics to enhance operational efficiency and predictive maintenance services.
• Address supply chain risks and material sustainability to ensure responsible sourcing and continuity of deliveries.
• Provide training, support and customer engagement services to facilitate adoption and maximise technology value.

Technology vendors and service providers will be critical enablers of the energy transition, delivering the innovation and support required for system transformation.

Conclusion

The comparative analysis of energy transition scenarios from 2025 to 2040 reveals distinct pathways shaped by technology deployment, policy ambition and market dynamics. Rapid decarbonisation scenarios demonstrate accelerated renewables expansion, significant coal-to-gas switching, and early retirements of high-emission assets leading to substantial emissions reductions and improved system costs over time.

Balanced transition pathways achieve steady progress through diversified energy mixes and incremental policy implementation, while delayed action scenarios incur higher cumulative emissions, elevated system costs and greater risks of stranded assets. Across all pathways, natural gas plays a critical bridging role, though its long-term viability depends on carbon management and evolving market conditions. Technology cost declines, supportive policy frameworks and investor engagement emerge as key enablers of transition success.

Critical success factors for the transition

Several factors are pivotal to realising effective and equitable energy transition outcomes:

• Stable and ambitious policy frameworks providing clear signals and incentives to guide investment and technology adoption.
• Robust financing mechanisms and risk mitigation tools that mobilise capital at scale and reduce perceived uncertainties.
• Technological innovation and cost reductions especially in renewables, storage, carbon capture and emerging low carbon fuels.
• Effective system integration and grid modernisation to manage variability and enhance reliability.
• Strategic management of workforce transitions and social impacts to ensure inclusive benefits and minimise disruption.
• International cooperation and aligned climate commitments fostering knowledge sharing, trade and investment flows.
• Resilience planning against physical, market and policy risks to sustain progress under uncertain conditions.

Success requires coordinated actions across governments, industry, finance and communities, with flexibility to adapt as conditions evolve.

Future research directions

To further strengthen energy transition planning and implementation, future research should explore:

• Granular regional and local pathway analyses incorporating socio-economic and infrastructure specificities.
• Advanced modelling of sector coupling and demand-side flexibility to unlock new decarbonisation opportunities.
• Deep dives into supply chain resilience and critical material availability for emerging technologies.
• Quantitative assessments of just transition policies and social equity outcomes.
• Integration of circular economy principles and energy efficiency improvements within transition scenarios.
• Longer-term outlooks beyond 2040 capturing potential technological breakthroughs and systemic transformations.
• Evaluation of behavioural and market design innovations influencing consumer engagement and decentralised energy resources.

Continued research combined with real-world data and stakeholder collaboration will enhance scenario robustness and guide more effective decision-making.